Stocks Climb but Technical Barriers Remain in Focus
Members received this update today:
Stocks finished higher on the day, with the S&P 500 rising more than 1%. Most of the move was driven by a decline in implied volatility following the drop in oil prices. Equity market IV had been very elevated, so a volatility compression was inevitable—it was just a matter of whether it would occur on Monday or Tuesday, ahead of VIX expiration on Wednesday.
Once the VIX settled around 23.5, the rally in the S&P 500 began to stall.
The index stalled right at 6,720, which corresponds to the mid-December low.
That was also my calculated max pain level across all expirations today in the S&P 500. If anything, there was a good reason for the S&P 500 to stop where it did today, to find resistance.
As for what happens from here, the path is not an easy one. The big outlier, of course, is the price of oil, but assuming the war does not take an unexpected turn for better or worse and oil remains in the $90s, S&P 500 implied volatility should naturally drift higher into the Fed meeting on Wednesday.
The index also remains below the 10-day exponential moving average, and as long as it stays there, the path of least resistance remains lower.
Oil fell by more than 5% on the day but remains stuck between the upper Bollinger Band and the 10-day exponential moving average. Nothing has really changed here. However, if oil continues to decline, it would be a significant positive for stocks and markets overall, as financial conditions would ease, rates would fall, and the dollar would weaken.
The dollar index fell sharply, which is not surprising given the decline in oil prices. The dollar remains just below 100.50, and it will likely take a move higher in oil to drive a breakout from here.
Finally, XLK is one to watch because it appears to be forming a descending triangle. A break below $138 could lead to a move down toward $127, based on a measured move from the peak of the triangle to the base. At this point, XLK would need to move above $141 to invalidate the pattern.
-Mike
Glossary by ChatGPT
Bollinger Band: A technical indicator using a moving average and standard deviations to define price volatility ranges.
Descending Triangle: A bearish chart pattern characterized by a flat support level and downward-sloping resistance.
Exponential Moving Average (EMA): A weighted moving average that gives more importance to recent price data.
Implied Volatility (IV): The market’s forecast of a security’s future volatility derived from option prices.
Max Pain: The price level at which the greatest number of options expire worthless, minimizing payouts to holders.
VIX Expiration: The settlement date for futures and options tied to the CBOE Volatility Index.
Disclosure
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